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Section Review

Comments from the Business Law Section

By Francis T. Talty

Francis T. Talty practices in Lowell with the firm of Talty & Talty PC, and is a visiting assistant professor of political science at the University of Massachusetts at Lowell. In addition to his service to the Massachusetts Bar Association as chairman of the Business Law Section Council, Talty has served as chair of its Judicial Administration and Access to Justice sections in prior years. In addition to his present appointment at the University of Massachusetts at Lowell, Talty has taught American Politics and Public Administration as adjunct faculty since 1979.

The Business Law Section appointed an ad hoc committee in 2003 to examine and report on proposed revisions to the Model Rules of Professional Conduct as adopted by the American Bar Association in 2003. Our committee, ably chaired by James C. Donnelly, Jr., of Mirick, O’Connell, DeMaille & Lougee’s litigation department, did a thorough job of analyzing the differences between the existing Massachusetts rules, particularly Rules 1.6 and 1.13, and presented its final report last fall.

The Business Section Law, after deliberative consideration, has recommended that the Massachusetts Bar Association House of Delegates endorse these ABA Model Rules and, in turn, recommend their formal adoption by the Supreme Judicial Court. The House of Delegates will consider this at its meeting on May 18, 2006.

The issues are presented below for all MBA members to consider and comment.

The recommended resolutions are:

A. That Rules 1.6 and 1.13 of the Massachusetts Rules of Professional Conduct be revised to conform to ABA Model Rules Of Professional Conduct as amended most recently on August 11-12, 2003; and

B. That the Massachusetts Bar Association review and supplement its existing programs, activities and services to inform, assist and support attorneys who may be confronted with difficult decisions that permit reporting or disclosing Confidential Information in accordance with Rules 1.6 and 1.13

By way of background

On Aug. 11-12, 2003, the ABA House of Delegates adopted and endorsed a statement of Principles Concerning Corporate Governance. It also amended Rules 1.6 and 1.13 of the Model Rules of Professional Conduct concerning confidentiality and the organization as a client. Both measures were a response to a climate of corporate scandal and the Sarbanes-Oxley Act of 2002.

The main thrust of the Corporate Governance Principles was to proclaim an enhanced role in corporate governance for lawyers representing public corporations. For example, “A lawyer representing a public corporation shall serve the interests of the entity, independent of the personal interests of any particular director, officer, employee or shareholder.” Furthermore, “The general counsel of a public corporation should have primary responsibility for assuring the implementation of an effective legal compliance system under the oversight of the board of directors.”

The main thrust of the amendments to Rules 1.6 and 1.13 was to free lawyers generally from constraints that might be perceived as hindering the enhanced role. For example, the amendment to Rule 1.6 permits lawyers to reveal confidential information to prevent a client from committing a crime or fraud that is reasonably certain to injure the financial interests or property of another, or to mitigate or rectify harm caused by such conduct, if the lawyer’s services have been used in furtherance of that scheme. The amendment to Rule 1.13 states that a lawyer for an organization who knows facts from which a reasonable person would conclude that an officer or employee intends to act or refuse to act in a matter related to the representation that violates a legal obligation to the organization or to commit a violation of law that might be imputed to the organization, and that the conduct is likely to injure the corporation, must proceed as is reasonably necessary in the best interest of the organization. This may include referring the matter to the highest authority in the corporation.

In September 2003, the Business Law Section Council constituted an ad hoc committee to study the changes and develop recommendations. At first, this seemed like it would be a simple task – but it proved otherwise. As it turned out, the Supreme Judicial Court had already adopted its own variation of the Rules of Professional Conduct. The Massachusetts Rules already contained many of the features that had only been added to the ABA Model Rules in the 2003 amendment. The overall intent of the existing Massachusetts Rules is quite similar to the amended ABA Model Rules. However, there are slight differences that are not susceptible to exact comparison. The differences could lead to different applications in particular cases, but it is impossible to precisely predict the result.

The Corporate Governance Principles present a different challenge at a more practical level. They purport to enhance the role of lawyers for public corporations in assuring good governance. Of course, the increased authority implies liability when the lawyer does not fulfill the responsibility. But the central question is whether the standard for public corporations will eventually migrate (or has already migrated) to privately owned companies as well. Logic says it probably should. After all, the fiduciary duty is fundamentally similar. It is arguably higher for private than for public companies. But this poses further challenges. As a practical matter, many lawyers representing private organizations are solo or small-firm practitioners with limited resources. In many cases, they depend on the client for a substantial portion of their income and will find it difficult to exercise independence.

Comments & analysis

Rule 1.6 Concerning Confidentiality

Massachusetts Rule 1.6 is already substantially similar to ABA Model Rule 1.6, as amended. Both rules permit a lawyer to reveal confidential information to prevent or rectify a criminal or fraudulent act that could harm financial interests or property of third parties. The language of the rules is different. Given that lawyers often cross state lines or deal with clients in other jurisdictions, there would be some advantage to uniformity with the model rule. However, the substance of the two rules is substantially similar.

It is significant that this rule permits a lawyer to reveal confidential client information in the enumerated circumstances – but does not require it. It only applies to situations in which a lawyer feels obligated by other considerations to reveal confidential information. Therefore, this rule does not by itself expose lawyers to greater risk. It lessens the risk in cases where they feel compelled to reveal confidential information.

Rule 1.13 Concerning The Organization As Client

Massachusetts Rule 1.13, likewise, is already quite similar to Model Rule 1.13 as amended, but a precise comparison is even more difficult than in the case of Rule 1.6. The Model Rule states that a lawyer reasonably believes that the client’s violation will cause substantial injury to the corporation, he may reveal confidential information “whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization.” The Massachusetts Rule, in contrast, permits the lawyer to resign and make such disclosures as are consistent with Rules 1.6, 3.3, 4.1 and 8.3, all of which mandate disclosures in some circumstances. And as a general proposition, existing Massachusetts Rules 3.3, 4.1 and 8.3 require more disclosure than the Model Rules. This is a very fine distinction that is difficult to quantify.

It would be hard to generate a hypothetical situation where disclosure is authorized under the Model Rule and not authorized under the present Massachusetts Rule. In general, the two rules set a substantially similar standard. Nevertheless, there would be an advantage in conforming Massachusetts Rules 1.6, 3.3, 4.1 and 8.3 to the ABA Model Rule simply to achieve uniformity with other jurisdictions.

ABA Corporate Governance Practices

The principles of corporate governance have no direct counterpart in Massachusetts law, but they do reflect the ABA’s response to the climate of scandal that prevailed in 2002 and to resulting legislations such as Sarbanes-Oxley. It is an appropriate response, endorsing the view that lawyers should play an enhanced role in corporate governance.

The ABA purports only to apply to public corporations. To the extent it reflects Sarbanes-Oxley, it will probably have little substantive impact beyond what Sarbanes-Oxley and other rule changes have already accomplished in the public company arena.

As a practical matter, lawyers serving privately owned companies have at least an equal responsibility, but there are two potential issues. First, lawyers in the private companies’ sphere have an even higher responsibility, because of the enhanced fiduciary duty between stockholders and directors of private companies. Second, the private company disputes often involve emotionally charged conflicts between stockholders who have varying degrees of personal relationships with the company lawyer. In some cases, the lawyer will have performed legal services for individual stockholders as well as the company. The lawyers will be susceptible to emotional conflict that will make it difficult to maintain professional neutrality, and will likely be exposed to greater risk of liability and disciplinary action if they fail to walk the fine line of neutrality and independence that is counseled by the Corporate Governance Practices and other similar fiduciary standards.

Basis of recommendations

The Massachusetts Rules are already substantially similar to the Model Rules, but there are slight are differences. The differences are not matters of substance, but they tend to cause confusion. Many Massachusetts lawyers practice in other states or before government agencies such as the SEC. Elimination of the differences between the Massachusetts Rules and the ABA Model Rules is not a substantial change, but it will promote uniformity. There is no substantial reason for maintaining the differences.

Nevertheless, the Business Law Section Council and its ad hoc committee believe that many lawyers are at a disadvantage when dealing with ethical considerations that permit disclosure of confidential information that may include client misconduct or fraud. The burden involves private companies just as much as publicly owned companies that are regulated by the SEC. The burden often falls on lawyers who practice alone or in small firms where only limited resources are available. The MBA currently provides members with a range or resources including access to ethical opinions on confidentiality, but many lawyers who could benefit from the existing services do not use them.

Therefore, the Business Law Section Council will recommend that the MBA intensify the educational programming that is offered to MBA members concerning the responsibilities of lawyers representing private companies and consider new strategies to publicize and encourage the use of such services.

Comments on the Business Law Section Council recommendations should be made to [e-mail ftalty].